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Depreciation and Project Value

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and save $1,500 a year in expenses. The opportunity cost of capital is 16 percent, and the firm's tax rate is 40 percent.

a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what are the cash flows of the project in Years 0-6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.

b. What is project NPV? $119.83

c. What is NPV if the firm uses MACRS depreciation with a 5-year tax life?

Solution Summary

The solution attaches a spreadsheet with the tables and analysis of the depreciation and project Value for a fictitious company called Bottoms Up Diaper Service.